Mitchell Demeter likens what’s happening in the cryptocurrency industry to what happened with cannabis a few years ago.
“A few years back, there were dispensaries on every corner, and many of those businesses were waiting for regulatory clarity,” says Mr. Demeter, CEO of Netcoins, Canada’s first regulated cryptocurrency platform owned by a public company. “Some cannabis companies were proactive and spoke with the regulators and informed them of how their business operated – from supply chain to pricing and quality control – and they helped the government establish the framework of what a licensed dispensary is going to look like.”
The companies that were proactive still exist today, Mr. Demeter says, while those operating without regulatory compliance are long gone.
The same may be true of cryptocurrency trading platforms. And Netcoins, which is wholly owned by BIGG Digital Assets, is so far the only licensed company that customers who want to get some crypto presence in their investment portfolios can access. The country’s two other licensed companies aren’t publicly traded.
Crytocurrency companies have been operating in a grey area, but with a licensing and regulatory system worked out, the Canadian Securities Administration is now starting to shut down those that don’t have licences.
“We’re going to take a piece of business that’s a certain size and only a handful of competitors will split it up,” says Mark Binns, CEO of BIGG Digital Assets. “This is a huge deal for Netcoins and those that get licensed. It also brings up a ton of advertising channels to us. Bell Media won’t take ads from companies that aren’t licensed. Now that we have a licence, we have a whack of advertising channels that we didn’t have before.”
Regulation brings value to the customer in that the financials of regulated companies are fully audited. These companies also undergo technical and operational audits. Netcoins’ customer funds are held in approved trust accounts while the cryptocurrency is held in approved infrastructure with insurance and cold storage.
“This should give consumers more confidence in our platform than they would have with an unlicensed brokerage,” Mr. Binns says. “If you’re going to buy yourself Apple stock, you’re never going to do it from an unlicensed seller. It’s laughable to think you’d ever buy a stock that way. In the future, it will laughable to think you’d buy crypto through a non-licensed provider.”
Mr. Demeter admits there’s been some fraud in the industry and hopes the new regulatory environment gives potential customers some comfort.
“When you’re dealing with investments and people’s finances and money, there needs to be a certain set of standards that companies operating in the space are held to, and that’s what we’ve done,” he says. “We’ve worked with the British Columbia Securities Commission and regulators across the country to ensure that our business, which is handling people’s money, has appropriate checks and balances in place to ensure consumer protection.”
Netcoins’ core business is as a brokerage that makes it easy for people to buy and sell cryptocurrency. Customers can go to its website, create an account and be verified and trading in minutes. They can trade Canadian dollars for cryptocurrency or they can trade crypto they already have for dollars they can withdraw.
“There are a lot of moving pieces in that business that you don’t really see,” Mr. Demeter explains. “We need to source those coins for the customer, we need to handle and store their money in a safe and secure way, as well as their digital assets. Those are some of the things we’ve addressed with regulators – how we store client funds, making sure our financials and infrastructure are audited, that our operation and our overall business has a continuity plan and that we’re a legitimate operator. The industry has been plagued by fraud over the years, and there weren’t any measures in place to stop these companies in the past.”
Without oversight, the fast-moving industry has had some problems as the story of QuadrigaCX, a Vancouver-based exchange, illustrates. The Ontario Securities Commission investigated and found that it was a “fraud” and a Ponzi scheme.
“If regulation was in place years ago, it would have saved a lot of pain for a lot of people,” Mr. Demeter says. “The regulatory framework will protect consumers against fraudulent and malicious actors and poor operators in general.”
Mr. Binns says Netcoins is different from its competitors because the latter intermingle their treasury funds (i.e. Canadian dollars) and crypto with their customer’s deposits, which is a problem if they go out of business because the money isn’t in trust.
“In our case, it sits in trust,” Mr. Binns says. “Our customers’ cryptocurrency is all kept with a third-party custodian so it’s held offline, not accessible to hacks and it’s insured. These are the things you have to do to get a licence, which makes investing via Netcoins a much safer thing to do.”
Now that it’s regulated, Netcoins can also partner with traditional fintech companies that see an opportunity but have been hesitant to enter the industry because it’s been unregulated and they don’t necessarily want to build their own platforms.
“We are already in conversations with a number of fintech companies,” Mr. Binns adds.
Advertising feature produced by Randall Anthony Communications. The Globe’s editorial department was not involved.